As generations that either grew up in an era of austerity or spent the bulk of the income producing years during economically good times, it must be worrying to some that their heirs are not fiscally prudent and will either spend the money carefully saved or earned through hard work. With literally billions being transferred to the next generation in the next few years, how does one pass down their net worth to the next generation without worrying it will all be frittered away?
There are only really two options to handing down assets to beneficiaries (either in life or in death although I will focus on the latter). Either it is given unconditionally or, well, it is not. If it is not, the typical legal tool is a trust. We often think about trusts as something only the uber-rich use. However, regardless of the net worth or income, it is one of the more flexible legal fictions available to anyone who wants to engage in some practical wills and estates planning.
In particular, a “spendthrift” trust describes a trust whereby the settlor (the creator of the trust) appoints a trustee (the person who holds legal title to certain property placed into a trust) to hold property for a beneficiary (the person(s) entitled to benefit from the trust) who is unable to control their spending. The terms of the spendthrift trust generally dictate that the trustee is only allow to provide enough resources periodically for the beneficiary to live some type of reasonable life-style. For example, a beneficiary may only be given $1,500 a month in living allowances to prevent the beneficiary from living a rich and famous lifestyle even if the trust holds substantially more assets.
The other situation is if there are elderly parents with non-minor children who do not believe their heirs are old enough to be able to manage even a modest gift of money (unearned wealth being a curse rather than a blessing). For example, parents may believe that their non-minor children should be at least 30 before inheriting $50,000. In this situation, the spendthrift trust can set up and wound down when the beneficiary turns 30. In the meantime, the trust is providing a small subsidy to the adult children.
Given the interplay between money and family, the key to a spendthrift trust is to appoint a trustee who is good with numbers, has some distance from the beneficiary and has the ability to say no without guilt. As a result, trustees of spendthrift trusts are often family accountants, family lawyers or professional trust companies (or family members who are estate trustees/executors are granted the authority to hire professionals help to manage the spendthrift trust). While there may be a cost involved to administrating the trust professionally, it certain less than the potential of the beneficiary spending all of his/her inheritance quickly.
Spendthrift trusts are useful tools in that, since title to the assets are held in trust, creditors of a beneficiary generally cannot attack the monies held in trust (monies paid out to the beneficiary are subject to creditor seizure). Thus, people with shopping addictions, gambling problems and substance abuse issues are often made beneficiaries of a spendthrift trust.
A spendthrift trust is definitely not something you can set up with a will kit you buy from the local stationary store. Careful attention must be paid to who the trustee would be, how much resources should be put into trust and the terms of payment to the beneficiary. As such, seeking qualified legal advice is a must. Furthermore, given this is a rather specialized wills and estates tool, don’t just go to the cheapest lawyer. Ask for a lawyer who has experience dealing with setting up trusts. It may cost a little more for the will but, again, the costs must be weighed against the potential of the estate being spent by an heir who can’t manage their finances properly.
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